Cuba struggles to attract investors despite reforms

(Reuters) – Cuba has yet to attract new foreign investors despite
launching two major initiatives in the past year, a sign of the
lingering caution over doing business with the communist government and
its own hesitancy to follow through on free-market-style reforms.

Cuba last November opened a China-style special development zone,
including a new container terminal at Mariel Bay. It also passed a new
foreign investment law in March, saying it needed more than $2 billion a
year in foreign direct investment to spur growth.

But despite cutting taxes and lowering customs barriers in line with
other investment regimes in the Caribbean, Cuba has yet to overcome the
disadvantages associated with the U.S. economic embargo as well as its
Soviet-style economy.

“Cuba has a ways to go in learning how to react with agility to business
opportunities,” said Pedro Freyre, who heads the international practice
at the Miami-based law firm Akerman LLP, which closely follows the
reforms under way on the island.

The new foreign investment law, which took effect at the end of June,
cut the tax on profits in half, eliminated a labor tax and granted new
investors an eight-year exemption on a profits tax.

Though potential investors welcome the tax cuts, some remain wary over
Cuba’s legal regime, especially after the recent jailing of a handful of
foreign executives and the seizing of their businesses over corruption
allegations.

Investment proposals under negotiation, which still must be approved at
the highest level of the Cuban government, include projects in light
manufacturing, packaging, alternative energy, pharmaceuticals and
warehouse shipping logistics, according to officials.

Consumer goods giant Unilever (UNc.AS) (ULVR.L), which left Cuba in a
dispute over who would have the controlling stake in a joint venture
with the government, is said to be negotiating a return to Mariel.

Two other companies considering operations in Mariel, according to
diplomats, are in joint ventures with the Cuban government: French
beverages company Pernod Ricard (PERP.PA) and cigarette maker BrasCuba,
part of the Brazilian subsidiary of British American Tobacco (BATS.L).

HIGH HOPES

Cuba’s economy is stagnating despite a raft of market-oriented reforms
initiated by President Raul Castro in 2008. Cuba reported growth of just
0.6 percent in the first half of this year and revised downward its
full-year growth forecast to 1.4 percent from 2.2 percent.

Castro has proposed moving 40 percent of the state labor force to a new
non-state sector made up of farms, small businesses, cooperatives and
joint ventures, and state-run companies have been granted more autonomy.

Bringing in more investment is seen as crucial to the economy. Castro
recently told the National Assembly that Cuba needs to attract a minimum
$2.5 billion per year to reach annual growth targets above 5 percent.

But eying such a quick pace of growth might be overly ambitious.

Omar Everleny, an economist who specializes in foreign investment,
estimated in a recent paper that just $5 billion had been invested in
Cuba over the last 20 years.

The government had hoped foreign companies would build factories or new
import-export installations at Mariel, some 28 miles (45 km) west of
Havana. The special economic zone, covering 180 square miles (466 square
km), drew some interest from potential investors, most of whom had
existing business ties with Cuba.

But they discovered a paucity of infrastructure in and around the port.
Land and utility prices had not even been established. No wage policy
was set. Lacking such basic information, companies delayed negotiations
and the feasibility studies needed for approval.

Likewise with the new foreign investment law, the promised lists of
investment opportunities by government ministries, from agriculture and
industry to food processing and pharmaceuticals, have yet to be drawn up.

“Cuba’s foreign investment law and its Mariel development zone are
emblematic of most of the recent reforms on the island. Many of the
changes are in the right direction, but not happening fast enough,” said
Peter Schechter, director of the Latin American program at the
Washington-based Atlantic Council.

Still, one Western diplomat predicts a number of ventures will be signed
by the end of the year.

“They have absolutely no choice but to change,” the diplomat said. “They
need investment in all sectors to survive.”